56 notecards = 14 pages (4 cards per page)
Which of the following is a financial risk that may be faced by a business organization?
Which of the following statements about the scope of risk management is (are) true?
Mid-States Beef is a commercial feedlot business. Currently, the company has over 10,000 cattle in feedlots. Mid-States is concerned that the price of corn, the grain fed to the cattle, will increase significantly. The risk that the price of corn may increase and harm the profitability of Mid-States Beef's operations is a(n)
An integrated risk management program is a risk management program which combines
Regional Airline (RA) spends millions of dollars each year on jet fuel. The company also has significant liability exposures. RA can retain a large portion of its liability exposure if fuel costs are low. The company can pay high fuel costs if retained liability losses are low. RA cannot, however, absorb both high fuel costs and high retained liability claims. RA's insurer designed an insurance program where the insurer pays only if both contingencies (high fuel costs and high retained liability claims) occur. The contract the insurer designed is called a(n)
Which statement is (are) true with respect to enterprise risk management programs?
A comprehensive risk management program that addresses an organization's pure risks, speculative risks, strategic risks, and operational risks is called a(n)
The property and liability insurance industry is characterized by a repetitive pattern of loose underwriting standards with low premiums followed by tight underwriting standards with high premiums. This repetitive pattern is called the
Which statement is (are) true regarding property and liability insurance market conditions?
Which of the following statements is true regarding insurance market conditions and underwriting results?
The relative level of surplus in the insurance industry is called the industry's
Which of the following statements is (are) true regarding investment returns and the underwriting cycle?
A large property and liability insurance company merged with a bank and then acquired a stock brokerage company. This type of merger and acquisition activity is categorized as
A company has a fleet of 200 vehicles. On average, 50 vehicles per year experience property damage. What is the probability that any vehicle will be damaged in any given year?
RST Company has production facilities in Salt Lake City and Cleveland. The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent. The probability that in any given year a fire will damage the Cleveland production facility is 4 percent. What is the probability that BOTH production facilities will be damaged by fire in any given year?
RST Company has production facilities in Salt Lake City and Cleveland. The probability that in any given year a fire will damage the production facility in Salt Lake City is 5 percent. The probability that in any given year a fire will damage the Cleveland production facility is 4 percent. What is the probability that AT LEAST ONE of the production facilities will be damaged by fire in any given year?
Some events cannot occur together because the occurrence of one event makes the occurrence of the second event impossible. Such events are called
Two buildings are located close together at a production facility. The probability that either of these buildings will experience a fire loss is 4 percent. However, if one building has a fire, the probability that the second building will have a fire is 60 percent. What is the probability that both buildings will have a fire?
Which of the following statements is (are) true with regard to probability analysis?
Jane is risk manager of ABC Manufacturing Company. She is trying to decide whether to self-insure her company's workers compensation exposure or to purchase insurance. Jane would like to use regression analysis to predict the number of workers compensation claims that will occur next year. The number of claims will be the dependent variable in the regression. All of the following would be reasonable independent variables to use EXCEPT
A method of characterizing the relationship between two or more variables and then using the characterization to make a prediction is called
A table showing losses that could occur and the corresponding chance that each loss could occur is called a(n)
Which of the following statements is (are) true with respect to the time value of money?
Calculating the present value of a future amount is called
The process of determining which set of investments in plant and equipment to undertake is called
Which of the following statements is (are) true regarding the net present value of a capital investment?
Millie is risk manager of JKL Company. She is considering an investment in a loss control project. The project will cost $40,000. Assuming a 10 percent discount rate, the present value of the future net cash flows that this project will generate is $60,000. What is the net present value (NPV) of this project?
A computerized data base that permits risk managers to store and analyze risk management data is called a
A grid charting the potential frequency and severity of losses is called a
Which of the following statements is (are) true with regard to the use of technology in risk management programs?
Terrorists attacked the World Trade Center on September 11, 2001. The attack simultaneously created large losses for life insurers, property insurers, workers compensation insurers, health insurers, and liability insurers. What name is given to an event that simultaneously creates large losses in several lines of insurance?
Which of the following was a consequence of passage of the Financial Modernization Act (Gramm-Leach-Bliley)?
The transfer of insurable risk to the capital markets through the creation of a financial instrument is called
LMN Insurance Company is concerned about its exposure to hurricane losses for property risks it insured on the Gulf Coast. LMN borrowed money from investors by issuing financial securities. LMN promised to repay the money it borrowed with interest if hurricane losses do not exceed a specified level. If hurricane losses exceed the specified level, LMN will repay less than it borrowed and use the extra money to fund hurricane losses. The securities that LMN issued are
Hedge Fund Company offers a mutual fund to investors. Fund managers are concerned about fund volatility. They analyzed the fund to determine the worst loss likely to occur in a calendar quarter, assuming a 90 percent level of confidence. The worst probable loss is known as the fund's
Reasons to adopt an enterprise risk management plan include all of the following EXCEPT
Which of the following statements concerning the securitization of risk is (are) true?
Insurance Brokerage Company uses a computer-based method of estimating the losses its clients will suffer if a severe storm or earthquake occurs. This method of estimating losses is called
Uncertainty pertaining to the organization's goals and objectives and the organization's strengths, weaknesses, opportunities, and threats is called
Consolidation in the insurance industry is a continuing trend. One area where mergers and acquisitions frequently occur is between marketing intermediaries who represent insurance purchasers. These intermediaries are called
Five Below Zero is a new ski resort in Colorado. Five Below Zero is concerned that an abnormally warm winter will prevent the accumulation of snow needed to have a profitable ski season. Five Below Zero purchased a contract that will pay a lump sum if the daily high temperature exceeds 30 degrees for more than 12 days between January 1st and March 31st. The contract Five Below Zero purchased is called a(n)
Which statement is (are) true concerning catastrophe models?
Which of the following is a financial derivative that derives value from specific insurable losses or from an index of values?
An emerging concern for risk managers is the greater volatility that has been observed in weather patterns—higher high temperatures, lower low temperatures, record rainfall, drought, etc. Collectively, this risk is called
Which of the following statements regarding terrorism insurance is (are) true?
The terrorism risk in the United States
Which of the following is a demographic factor that has increased losses from climate change in the United States?
Last year, XYZ Insurance Company had a combined ratio of 102.4 and lost $10.2 million on the insurance that it sold. The company, however, was required to pay income taxes. The best explanation for this apparent contradiction is that XYZ offset its underwriting loss with
ABC Company in considering a loss control investment. The project will cost $100,000. It will generate an after-tax net cash flow of $60,000 one year after investment and an after-tax net cash flow of $60,000 two years after investment. The present value of $1 received one year from today assuming a 6 percent rate is .9434. The present value of $1 received two years from today assuming a 6 percent interest rate is .8900. Assuming a discount rate of 6 percent, what is the net present value (NPV) of this project?
Which of the following statements about the risk of terrorism in the United States is (are) true?
When announcing that an enterprise risk management program would be implemented at XYZ Company, the president of the company observed, “We must overcome the silo mentality for the program to be successful.” The “silo mentality” refers to
The first step in the enterprise risk management process is
A bank stores depositor data electronically. The data include financial account values, social security numbers, and other information. An outside party was able to gain access to the bank’s customer data through unauthorized access to the bank’s computer system. The outside party was able to steal money from the accounts and to sell customer data, including social security numbers, to others. This scenario illustrates
A risk manager analyzed fleet accident data to help determine which loss control measures would provide the greatest safety incentives for drivers. Examining data to generate information that will help make more informed decisions is called
West Coast Insurance writes property and liability insurance in California, Oregon, and Washington. These states are all susceptible to earthquakes. To help determine how much reinsurance to purchase, West Coast Insurance hired an organization to use a computer algorithm to estimate what its insured losses would be if a severe earthquake occurred. West Coast Insurance based its purchase of reinsurance on the loss estimates. This scenario illustrates using
Palmer Polymers is changing from a traditional risk management program to an enterprise risk management program. As a first step, the risk manager determined all the risks that the organization faces. Next, she created a grid with loss frequency on the x-axis and loss severity on the y-axis. Then she plotted all of the loss exposures based on frequency and severity. The grid and the plotted loss exposures are called a